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On Tuesday the Distributed Energy Financial Group released its 2015 report, Annual Baseline Assessment of Choice in Canada and the United States (ABACCUS). The report provides an excellent overview of the current state of retail electricity markets in the 18 jurisdictions in the U.S. and Canada that permit at least some degree of retail competition. The overall result will not surprise anyone who follows the electricity industry or is a KP reader: for the eighth year in a row, Texas tops the rankings by a wide margin, with Alberta second and Pennsylvania third. And the general trend is promising, both in terms of market experimentation and regulatory institutional change to reduce barriers:

In nearly every jurisdiction in North America, REPs continue to expand their presence, increase the number of offerings, and increase the variety of offerings in the residential marketplace. These positive developments are primarily in response to market opportunities, but the activities of regulators to facilitate retail choices should not be glossed over. Regulators have reduced barriers to entry, facilitated the speed and ease of market transactions, and raised public awareness about the opportunities for retail choice. Numerous states have invested in advanced metering infrastructure, providing lower-cost access to detailed consumption data. These data are essential to offer time-differentiated prices, to track the costs to serve an individual consumer (rather than relying on an estimated load profile) and to offer new products and services, including prepaid service, high-usage alerts, or targeted price-risk management offers. Combining advanced mobile communications with advanced metering data has also facilitated new products and services.

The report is also extremely clear and well-written, so if you are interested in learning more about retail electricity markets and regulatory policy, and what the current trends are in the distribution and retail segments of the industry, read this report. Its appendices also provide state-by-state (province-by-province) summaries with extensive detail.

The report’s policy recommendations are in keeping with the idea that market processes provide opportunities for producers and consumers to benefit through experimentation and trial-and-error learning, and that product differentiation through innovation is the most potent form of dynamic competition for creating meaningful consumer benefits. Note in particular that their recommendations focus on default service, suggesting to

Reform default service in the near term … Allow competitive suppliers to provide default service instead of the incumbent utilities … Limit residential default service pricing to basic (“plain vanilla”) service and let the market offer other choices … Adopt a plan to phase out default service. The plan must reflect the realities of each jurisdiction. No two plans would be the same as each jurisdiction must be mindful of past decisions.

I am thrilled to see these recommendations, because incumbent default service can be a costly obstacle and entry barrier for small, new potential entrants. In fact, my Independent Review article from last fall lays out the precise economic argument for how incumbent default service can be an entry barrier and why regulatory policy should “quarantine the monopoly”:

Incumbent vertical market power in deregulating markets can be anticompetitive, as seen in the current process of retail electricity restructuring. This paper uses the AT&T antitrust case’s Bell Doctrine precedent of “quarantine the monopoly” as a case study in incumbent vertical market power in a regulated industry. It then extends the Bell Doctrine by presenting an experimentation-based theory of competition, and applies this extended framework to analyzing the changing retail electricity industry. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and lackluster performance of retail electricity markets for residential customers.

In the case of Texas, default service was indeed transitional, as intended, and was not provided by the incumbent.

The issue of incumbent default service as an entry barrier may be part of the upcoming “utility of the future” discussion that will take place in Illinois, according to this Retail Energy X story:

If the Illinois Commerce Commission opens a “utility of the future” proceeding, the structure of default service, including its potential elimination, would likely be discussed in such proceeding, ICC Commissioner Ann McCabe said during a media call discussing the Annual Baseline Assessment of Choice in Canada and the United States.

Asked about the ABACCUS recommendation to end default service, McCabe said, “That’s subject to discussion. If we pursue some kind of ‘utility of the future’ initiative, that will be one of the questions likely to be addressed.”

On Friday, the U.S. Department of Transportation announced it had launched an investigation into possible “unfair practices (e.g., price gouging) affecting air travel during the period of time that Amtrak service along the Northeast Corridor was delayed or suspended as a result of the May 12th derailment.” Five airlines received letters from the agency seeking information on prices for travel between airports most affected by the derailment. CBS News in New York had the story, as did many other media outlets.

In the statement released by the DOT Transportation Secretary Anthony Foxx said, “The idea that any business would seek to take advantage of stranded rail passengers in the wake of such a tragic event is unacceptable. This Department takes all allegations of airline price-gouging seriously, and we will pursue a thorough investigation of these consumer complaints.” The DOT was responding to consumer complaints and a letter from U.S. Senator Chris Murphy (D-CT).

Pure political theater.

The law DOT cites, 49 US Code § 41712, allows the department to investigate whether an airline “has been or is engaged in an unfair or deceptive practice or an unfair method of competition in air transportation or the sale of air transportation.” In the event the department finds price gouging, the sole remedy present in the law is to order the airlines to stop. Given that rail travel was restored after five days, prices have already returned to normal. No meaningful remedy is possible…

…unless DOT wants to go big: rather than finding the prices constituted unfair practices, the DOT could conclude that the airlines’ computerized pricing algorithms constitute unfair practices and order airlines to cease employing them. The airlines’ dynamic pricing systems are not popular with consumers, so they might make an appealing political target. Such a response would be meaningful, in that it would impose significant costs on airlines to reform their systems, but is such a conclusion likely?

The word “unfair” is not defined in the law; the DOT said it relies upon the U.S. Federal Trade Commission’s Policy Statement on Unfairness for a working definition. The policy statement provided a three factor approach to fairness. considering: (1) consumer injury, (2) violation of public policy, and (3) unethical or unscrupulous conduct. In practice the FTC relies only on the first two factors.

Under the policy, apparent consumer injury is judged against the commercial benefits associated with the trade practice. While dynamic pricing is unpopular with consumers, it is profitable for airlines. In addition, it likely produces prices and service quality that are, on average, better for consumers than otherwise. A balancing of apparent harms and apparent benefits should tilt in favor of dynamic pricing.

Here is my political economy-based prediction:

After a month or two the DOT will report finding that airline prices did jump suddenly after the derailment as demand for air travel jumped up. They will observe that initial price spikes resulted from airlines’ computerized pricing mechanisms and did not reflect an intent to “take advantage of stranded passengers in the wake of such a tragic event.” They will note that airlines responded by adding flights and pressing larger aircraft into service. The report will conclude temporary price spikes reflected the ordinary workings of supply and demand under short-lived extraordinary circumstances. No finding of unfair practices will result, and no trade practices will be condemned.

While the announcement of the investigation produced a lot of press, the release of the report will produce little press. A finding of “ordinary workings of supply and demand” is not newsworthy.

What is more, the DOT already knows this answer. It already believes there is nothing to find in the data it is requesting. Still, a Senator wrote a letter — by the way Senator Murphy sits on the Senate subcommittee that oversees the DOT budget — and the DOT responded.

The Senator himself, too, either already knows this answer or simply has not thought too hard about it. But why should he think about a future no-news report? The announcement of the investigation and the press that the announcement garnered, that was the goal. The rest is noise.

At the Dallas Morning News James Osborne reports on the controversy over minimum use fees in the competitive retail power market that includes most Texas households. As discussed here at Knowledge Problem last week, retail suppliers sometimes design contract offers to be especially cheap for consumers using 1000 kWh per month. The state’s powertochoose.org website defaults to presenting offers from low to high by the average cost of power at exactly 1000 kWh per month. Minimum use fees can be used to help boost an offer to the top of the ranking.

Minimum use fees are sometimes controversial — consumers feel penalized for conserving resources — and the Texas state legislature looked into the issue earlier this year. Osborne wrote:

During this year’s legislative session, Rep. Sylvester Turner, D, Houston, introduced a bill banning retailers from charging customers for using too little power. Power companies quickly lined up against the bill, arguing the fees were essential to the financial health of the retail industry, which must navigate wide swings in wholesale power prices. The legislation never made it onto the House floor.

But Osborne noticed, “For some companies, the controversy presents an opportunity.” He explains retailers offer an increasing variety of plans – some with free nights and weekends for example, others designed to accommodate solar panels, and still others that reward conservation over consumption.

A Houston Chronicle analysis in January 2015, link below, concluded over 70 percent of the contract offers for the Houston area included minimum use fees, but then nearly 30 percent of the offers did not. Consumers simply need to understand a bit about their own power consumption and shop accordingly.

To help provide consumer information on competitive retail offers in the Texas electric power market, the Public Utility Commission of Texas maintains a website at www.powertochoose.org. Enter your zip code, click a button, and it will display the top ten (out of nearly 300) offers.

Because the table shows the lowest priced offers first, with the average calculated assuming 1000 kWh of energy consumption, companies can compete for the front page by minimizing their average price at exactly 1000 kWh. But as it turns out, the low cost offer at exactly 1000 kWh of consumption may not be the low cost offer for consumers using a little bit less or a bit more than 1000 kWh.

For example, when I search for downtown Houston (zip code of 77002) the website tells me there are 290 plans available. Click “View Results” and at the top of the table is Texans Energy’s “12 Month Texans Choice” plan at an amazing 4.3¢ per kWh (for comparison, the U.S. average residential power price is around 11¢ or 12¢ per kWh).

But check the offer’s “Electricity Facts Label”: Texans Energy obtains the top spot via a rate design of 10.8¢ per kWh but tossing in a $65 credit if usage falls between 999 kWh and 1200 kWh during the billing cycle. The usage credit creates a low-price sweet spot at 1000 kWh. (The second result is Texans Energy’s similarly designed “6 Month Texans Choice” plan.)

The rest of the first 10 results work similarly to blend in a bill credit kicking in around 1000 kWh to create a low-price sweet spot at that consumption level:

Power Express’s “#Super6” rate at an amazing 4.4¢ per kWh, which they produce via 12.4¢ per kWh rate with an $80 bill credit for consumers using more than 999 kWh.

Pennywise Power’s “Wise Buy Conserve 6 Plus” also showing 4.4¢ per kWh. Their rate includes a usage credit of $25.00 per cycle for consumption between 999 and 2001 kWh.

Discount Power “Prime 24” showing at 4.5¢ per kWh, obtained with an 11.04¢ per kWh and a bill credit of $65 for consumers using more than 999 kWh in a billing cycle.

Gexa Energy’s “Gexa Choice 6” showing at 4.5¢ per kWh. The rate includes a “monthly service fee” of $14.95 for consumption of less than 1000 kWh and a “residential usage credit” of $25 for consumption of more than 999 kWh.

Also showing on the first page of the Power To Choose results: The Frontier Utilities “Frontier Credit Back 3” plan similarly offers a $60 credit for usage of more than 999 kWh per month. Our Energy “Our Optimal Residential Plan” also offers an $80 credit for usage greater than 999 kWh per month.

Clearly rates are being designed for prominent position on the Power To Choose website. No doubt these offers are good deals for consumers who regularly consume at or a little above the 1000 kWh level and watch their usage. But because the consumer bill will jump significantly at consumption levels just below 1000 (and in some cases above either 1200 or 2000 kWh), they could be surprisingly expensive contracts for consumers who are not so careful.

The power to choose

But the consumer has the “power to choose.” On the results page the viewer can select estimated use levels of “500 – 1,000 kWh,” “1,000 – 2,000 kWh,” and “more than 1,000 kWh.” The selection re-sorts the results based on average price estimates at the 500, 1,000, and 2,000 kWh usage levels. (The middle is the default.) Consumers who use less than 1000 kWh monthly can easily find a contract good for them, perhaps the Infinite Energy “Conserve and Save 3-month” offer that includes a $9.95 credit for consuming less than 1,000 kWh and averages just 4.2¢ per kWh at 500 kWh!

A little different deisgn is 4CHANGE ENERGY’s “Value Saver 6,” which has a per kWh rate that drops between 500 and 1000 kWh usage, but jumps by nearly 5¢ per kWh at 1001 kWh. The effect is that of a rolled-in billing credit that grows in size with usage from 500 to 1000 kWh. The average rate is 8.6¢ per kWh at 500 kWh, drops to 4.9¢ per kWh at 1000 kWh, but rises to 7.6¢ per kWh at 2000 kWh. Unlike many of the above rate designs, however, the “Value Saver 6″ does not have sharp jumps up or down.

Don’t like complications? Maybe Discount Power’s “Saver – No Gimmicks No Minimum Usage Fee – 24″ plan is for you. Just as described: no minimum usage fee, just a fixed flat rate that averages about 8¢ per kWh.

Gaming is good

Overall, the competition is good for consumers. These supplier games may create traps for unwary customers, but consumers in Downtown Houston currently have 290 contract offers from over 50 different suppliers to choose among. Most residential consumers in the competitive retail part of Texas have a similar number of opportunities. It is easy to avoid the traps!

These suppliers offer contracts that differ across many margins: fixed price vs. variable, flat price vs. time-of-use, different levels of renewable content, pre-paid or not, terms ranging from 1 month to several years. On the other hand, Texas residential consumers outside of the competitive region (either because outside of ERCOT or because served by a municipal or coop utility in ERCOT that opted to stay out) are lucky to see more than two or three different options from their local monopoly utility. These offers might include a fuel cost adjustment tracking wholesale costs to a degree, and might get adjusted annually. But dynamic? No. Competitive? No.

The competitive retail electric power market for residential consumers in Texas is probably the most dynamic one around. With a little care consumers can avoid the gimmicks and find a pretty good deal.

HT: Big thanks to the economically-savvy anonymous tipster who brought the gamesmanship to my attention.

In 1800 the average income per person…all over the planet was…an average of $3 a day. Imagine living in present-day Rio or Athens or Johannesburg on $3 a day…That’s three-fourths of a cappuccino at Starbucks. It was and is appalling. (Now)… the average person makes and consumes over $100 a day…And that doesn’t take account of the great improvement in the quality of many things, from electric lights to antibiotics.

McCloskey credits a culture that embraces change and commercial activity as having moral weight as well as yielding material improvement. Joseph Schumpeter himself characterizes such creative destruction as:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. […] This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

Much of the support for this perspective comes from the dramatic increase in consumer well-being, whether through material consumption or better health or more available enriching experiences. Producers create new products and services, make old ones obsolete, and create and destroy profits and industries in the process, all to the better on average over time.

Through those two lenses, the creative destruction in process because of the disruptive transportation platform Uber is a microcosm of the McCloskeyian-Schumpeterian process in action. Economist Eduardo Porter observed in the New York Times in January that

Customers have flocked to its service. In the final three months of last year, its so-called driver-partners made $656.8 million, according to an analysis of Uber data released last week by the Princeton economist Alan B. Krueger, who served as President Obama’s chief economic adviser during his first term, and Uber’s Jonathan V. Hall.

Drivers like it, too. By the end of last year, the service had grown to over 160,000 active drivers offering at least four drives a month, from near zero in mid-2012. And the analysis by Mr. Krueger and Mr. Hall suggests they make at least as much as regular taxi drivers and chauffeurs, on flexible hours. Often, they make more.

This kind of exponential growth confirms what every New Yorker and cab riders in many other cities have long suspected: Taxi service is woefully inefficient.

Consumers and drivers like Uber, despite a few bad events and missteps. The parties who dislike Uber are, of course, incumbent taxi drivers who are invested in the regulatory status quo; as I observed last July,

The more popular Uber becomes with more people, the harder it will be for existing taxi interests to succeed in shutting them down.

The ease, the transparency, the convenience, the lower transaction costs, the ability to see and submit driver ratings, the consumer assessment of whether Uber’s reputation and driver certification provides him/her with enough expectation of safety — all of these are things that consumers can now assess for themselves, without a regulator’s judgment substitution for their own judgment. The technology, the business model, and the reputation mechanism diminish the public safety justification for taxi regulation.

Uber creates value for consumers and for non-taxi drivers (who are not, repeat not, Uber employees, despite California’s wishes to the contrary). But its fairly abrupt erosion of the regulatory rents of taxi drivers leads them to use a variety of means to stop Uber from facilitating mutually beneficial interaction between consumers and drivers.

The technology that allows Uber to operate is not going anywhere. No matter how many cars French taxi drivers set on fire or how many regulations French lawmakers pass, demand for Uber’s technology will remain high.

If French taxi drivers want to survive in the long term perhaps they should consider developing an app to rival Uber’s or changing their business model. The absurd and embarrassing Luddite behavior on French streets last week and the arrest of Uber executives ought to prompt French lawmakers to consider a policy of taxi deregulation that will allow taxis to compete more easily with Uber. Unfortunately, French regulators and officials have a history of preferring protectionism over promoting innovation.

Does anyone think that France will succeed in standing athwart this McCloskeyian-Schumpeterian process? The culture has broadly changed along the lines McCloskey outlines — many, many consumers and drivers demonstrably value Uber’s facilitation platform, itself a Schumpeterian disruptive innovation. The Wall Street Journal opines similarly that

France isn’t the first place to have failed what might be called the Uber Test: namely, whether governments are willing to embrace disruptive innovations such as Uber or act as enforcers for local cartels. … But the French are failing the test at a particularly bad time for their economy, which foreign investors are fleeing at a faster rate than from almost any other developed country.

The company is not doing enough to convince governments or the European public that it isn’t a scam. … Uber is not just a victim; it has invited much of the trouble. Katherine Teh-White, managing director of management consulting firm Futureye, says new businesses need to build up what she calls a “social license to operate”

He then goes on to list several reasons why he believes that Uber has not built a “social license to operate”, or what we might more generally call social capital. In his critique he fails to hold taxi companies to the same standards of safety, privacy, and fiduciary responsibility that he wants to impose on Uber.

But rather than a point-by-point refutation of his critique, I want to disagree most vigorously with his argument for a “social license to operate”. He quotes Teh-White as defining the concept as

This is the agreement by society or a community that an organization’s practices and products are acceptable and aligned with society’s values. If society begins to feel that an industry or company’s actions are no longer acceptable, then it can withdraw its agreement, demand new and costly dimensions, or simply ‘cancel’ the license. And that’s basically what you’re seeing in Europe and other parts of the world with Uber.

Bershidsky assumes that the government is the entity with the authority to “cancel” the “social license to operate”. Wrong. This is the McCloskey point: in a successful, dynamic society that is open to the capacity for commercial activity to enable widespread individual well-being, the social license to operate is distributed and informal, and it shows up in commercial activity patterns as well as social norms.

If French people, along with their bureaucrats, cede to their government the authority to revoke a social license to operate, then Matthew Feeney’s comments above are even more apt. By centralizing that social license to operate they maintain barriers to precisely the kinds of innovation that improve well-being, health, and happiness in a widespread manner over time. And they do so to protect a government-granted cartel. Feeney calls it embarrassing; I call it pathetic.

Most economic theory focuses on commodity markets, in which anyone willing to pay the price gets the good and anyone not willing to pay the price doesn’t. In matching markets, price isn’t the only determinant of who gets what. Willingness to pay the price is one determinant of who gets into Harvard but not the only one. Willingness to accept a certain wage is one part of who gets a job but not the only one. In some cases, such as assigning kidneys to dialysis patients, price isn’t part of the equation at all—at least in the United States.

Mr. Roth’s work has been to discover the most efficient and equitable methods of matching and implement them in the world. He writes with verve and style, describing many market malfunctions—from aboriginal tribes in Australia arranging marriages for children not yet born to judges bending every rule in the book to hire law clerks years before they have graduated from law school—and how we ought to think about them.

Mr. Roth’s approach contrasts with standard debates over free markets versus government regulation. We want markets to be thick, quick, timely and trustworthy, but without careful design markets can become thin, slow, ill-timed and dangerous for the honest. The solution to these problems is unlikely to be regulation legislated from on high. Instead what Mr. Roth practices is nuanced market design created mostly by market participants.

Like this:

OVERVIEW: A report filed with the US Department of the Interior recommended that terms governing the leasing of federal land for oil and gas development be updated to reflect social costs associated with such development. While such costs may be policy relevant, I suggest social costs are smaller than the report indicates and the recommended policy changes are not well focused.

Hein said social costs are imposed by oil and gas development on federal lands both during development and during production. She wrote:

America’s public lands offer millions of people a place to hike, camp, hunt, fish, and enjoy scenic beauty. They provide drinking water, clean air, critical habitat for wildlife, sites for renewable energy development, as well as natural resources including timber, minerals, oil, and natural gas. As soon as energy exploration begins, competing uses of federal land such as recreational enjoyment, commercial fishing, and renewable energy development are impaired, and continue to be foreclosed for the duration of production.

Hein listed the following social costs of oil and gas activity on federal lands*:

She recommended increasing rental rates and royalties to reflect social costs associated with development and production of oil and gas on federal lands.

GETTING SOCIAL COSTS RIGHT

Naïve application of Hein’s list would likely produce significant over-counting of social costs. Regan and I described social costs as “the sum of all future benefits foregone by one or more persons due to oil and gas development activity on federal lands.” We were imprecise. We cannot simply sum up all possible future foregone benefits, but rather we should focus on the difference in benefits between two specific cases: one case with oil and gas resources leased for development, and a second case in which the land is not leased.

The social costs of oil and gas leasing is the sum of the specific incremental differences in the stream of future benefits associated with the land leased for oil and gas development as compared to the best alternative use. Specification of the second case is key. Assume, for example, that if the property is not leased for oil and gas development, then it would be leased for PV solar power development. Leasing the land for PV solar power also involves some loss of timber value, wildlife habitat, recreational value, and so on. In counting the social costs of oil and gas leasing associated with, say, wildlife habitat, we need to focus on just the difference in wildlife habitat between the two cases. If recreational use is impaired equally, the loss of recreation value is not properly counted as a cost of oil and gas leasing.

Consequences, or rather, the differences in consequences beyond the property itself matter too. It is likely holding a specific tract of property out of oil production has no effect on total world oil production and consumption, and therefore there would be no difference in total air pollution, traffic, potential for oil leaks, and so on. Withholding a particular property out of development primarily would affect the location, not the total amount, of these costs. Location can matter: we likely do not want to increase traffic and local air pollution in already crowded areas. But location does not always matter: the greenhouse gas implications are the same whether a methane leak arises from development on federal land or elsewhere.

SUMMING UP

A careful identification of the social costs of oil and gas leasing associated with specific federal properties would reveal these social costs to be smaller than a naïve application of Hein’s list may suggest. Federal oil and gas policies governing the government take primarily affect the distribution of social costs, not the total amount. Most relevant social costs are highly localized to the area of development, a feature which should make them easier to manage.

Other issues arise with Hein’s proposal to increase rental rates and royalty rates to account for social costs. While charging a higher royalty rate, for example, would discourage development of federal lands at the margin, it would not encourage operators to minimize social costs on properties that are developed. Other policy levers may be more useful.

*NOTE: The list of social costs is my summary drawn from Hein’s report. We might dispute aspects of the list, but for purposes of this post I am more interested in the social cost concept rather than the particular items listed.